Calm returned to Mandalay after the city was placed under curfew Thursday to quell violence that saw mobs wielding airguns, swords, rocks and other weapons go on a rampage, leaving one Buddhist and one Muslim dead.

It was the latest in a string of deadly religious clashes that have plagued the former junta-run nation for two years, prompting warnings that the country's fragile transition to democracy could be imperilled.

Violence broke out on Tuesday after an accusation of a rape of a Buddhist woman by two Muslim men from a local tea shop was spread on the Internet, prompting a crowd of hundreds to gather near the business, hurling stones and damaging property.

"The violence happened because of hate speech and misinformation spread online," an official from the president's office, who asked not to be named, told AFP.

He said the situation was now under control and the government so far had no specific plan to tackle inflammatory remarks posted on the Internet.

Friends and relatives of the Buddhist man killed on Wednesday, a 36-year-old father of three, expressed their shock and outrage as they prepared to hold his funeral.

"He was like a brother to me," said Htwe, who was with the dead man on the night of the attack.

He showed AFP injuries on his hand that he said were slash marks from a "sword" used by a group of Muslims to kill his friend.

"I will hold a grudge for the rest of my life," he said of the attack.

A funeral for the dead Muslim man, a popular local bicycle shop owner, was held Thursday, hours after he was killed while on his way to attend early morning prayers.

Kari Hasan, the head of nearby Shaeshaung mosque, said the Muslim community had become a target of hate speech and had been let down by the authorities.

"If something happens they suddenly say it is because of Islam. With the new government we expected good things but we only get bad things," he said.

- Fears of more riots -

Sectarian clashes have left at least 250 people dead and tens of thousands displaced since fighting first broke out in western Rakhine state in 2012.

Most of the victims of the violence have been Muslim and clashes have often erupted as a result of rumours or individual criminal acts.

Radical monks have been accused of stoking religious tensions, while the security forces have been accused of failing to prevent attacks.

Opposition leader Aung San Suu Kyi blamed the authorities for the worsening violence and warned of the dangers of unsubstantiated reports.

"The authorities should properly handle those people who are spreading rumours. Without rule of law, more riots will come," she told Radio Free Asia, according to remarks posted on the broadcaster's website.

In a monthly radio address broadcast this week, Myanmar's reformist President Thein Sein said the country was a "multi-racial and -religious nation" that could only maintain stability if people live "harmoniously".

"For the reform to be successful, I would like to urge all to avoid instigation and behaviour that incite hatred among our fellow citizens," he said, according to an official transcript.